I wonder what housing investment skeptics [sic] Robert Shiller thinks of people who make their livings as landlords. How does this irrational, money losing market exist? After all, if you can’t make a profit by buying a home and renting it to yourself, how is a landlord supposed to?
Pointer from Tyler Cowen.
It is useful to think of owning a house as going into business as a landlord, with you and your family as tenants. I read Ozimek as encouraging us to think along such lines, which makes sense to me. Some further thoughts:
1. As your own landlord, you do not pay income taxes on the rent from your tenants. By the same token, you do not get to deduct as many expenses from your income.
2. As your own landlord, you might have an exorbitant amount of your wealth tied up in your rental property. You can choose less leverage and more diversification by investing instead in the stock market. Ozimek makes it sound like it’s a good thing that you can invest so heavily in housing with so little money down, but leverage multiplies losses as well as gains.
3. Mortgage lenders/investors tend to make a profit, and they are on the opposite side of the transaction as the home buyer. It is unlikely that being on one side is always better than being on the other.
4. My guess is that the landlords who make a profit are smart/lucky speculators. That is, they buy low and sell high. Just buying a random property at a random time and renting it out is less likely to be profitable.
5. As a household, you choose when to buy and sell based on many considerations other than timing the market. A landlord makes the decision solely based on trying to time the market. In the terminology of financial economics, the landlord is a “news trader” and the home buyer is a “noise trader.” On average, news traders tend to profit at the expense of noise traders.
The bottom line is that, yes, you should think like a landlord when you decide about buying a home. And a successful landlord is one with skill and/or luck at choosing when to buy and when to sell. Robert Shiller has a lot of evidence for mean reversion in the ratio of price-to-rent in the housing market. But he does not make his living as a housing speculator. Landlords do.